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How Do I Set Up a Living Trust After a Divorce?

Living Trust Plan

A living or family trust, also known as inter vivos trust, is a form of trust that can be used by a family to leave a financial legacy for future generations.

There are various advantages to establishing one, including ensuring that your money is distributed to your family and avoiding public exposure of trust assets.

However, figuring out how to properly assign or adjust beneficiaries after a divorce can be tricky. Below we will walk you through setting up a living trust after a divorce and explain how life insurance works with your living trust.

How do I start a living trust after a divorce?

Many people who wish to set up a living trust consider hiring a living trust attorney. Hiring a living trust lawyer might cost between $1,000 and $3,000, which does not guarantee you high-quality service.

Fortunately, you don’t need an attorney to create a living trust, but you must understand how to do so on your own.

If you are not divorced yet, consider hiring a good and experienced lawyer to help you navigate creating a living trust while still legally married. Divorce affects taxes and insurance, so your trust may need adjusting after the divorce is finalized.

If you are divorced already, the process is straightforward. A living trust deed often begins with a simple format that comprises the following details:

  • The trust's creator (your name if it's your trust), also known as the "settlor"
  • The trustee, or the person in charge of managing the trust (again, if it's your trust, this is your name)
  • The trustee who will manage the trust and distribute the property when the original trustee dies or becomes disabled — typically, a spouse, close friend, or adult child
  • The trust's beneficiaries, or the people who will receive the trust's assets (the same as in a will)
  • The trustees who will be in charge of any property bequeathed to minor recipients. When children or young adults receive property from a trust, it is common for a delegated trustee to handle the property for them until they reach a mature and competent age to manage it themselves.

 

Sign your trust in front of a notary once you have completed it with all the necessary details. Afterward, to make it viable, use a title or standard transfer form to transfer the trust's property into the trustee's name in accordance with the trust's provisions.

The subsequent phase is to finance the trust. This entails transferring property ownership to the trust. Real estate will require a deed, and other assets should be re-titled in the trust's name.

You can include a provision in your will that names the trust as the beneficiary of any assets that you do not place in your trust or name in your will. However, these assets will go through probate and will not be transferred to the trust instantly.

What happens to a living trust in a divorce?

In a divorce, everything you and your spouse own is divided into two categories: "community property" and "separate property." Everything you and your spouse earned or acquired throughout your marriage is community property. It makes no difference whose name it's in.

Separate property refers to assets that are exclusively yours or your spouse's. This includes any property you held before you married, as well as gifts and inheritances.

If one spouse is in possession of separate property, they will retain these assets after the divorce and not be required to split them. However, each state may vary in its laws so this is not a guarantee. The judge will determine if separate property will be required to be split or if it may stay in possession of the spouse who originally obtained it.

There are some exceptions to the separate property law. For example, if you inherited a home from a family member and then added your spouse's name to the deed, this would likely become communal property rather than separate. The same can be said for bank accounts you had individually created and then added your spouse to.

Another potentially sticky situation is property or assets you stand to inherit. While small ticket inheritances likely won’t cause many problems, large assets might be a different story.

A judge may take these future inheritances into consideration during your divorce proceedings and decide to split their amount with your soon-to-be ex-spouse.

When you have a communal property in a living trust, your spouse will almost certainly have half of it. If you and your spouse created the trust with common property, the trust itself may be community property.

The trust will have to be dissolved in this scenario, and the trust's assets will have to be shared equally between you and your spouse.

Irrevocable Trusts vs. Revocable Trusts: What's the difference?

The entitlement of your spouse to assets in your living trust is also determined by whether the trust is revocable or irrevocable. You can name yourself as trustee or beneficiary of a living revocable trust and have complete control over the trust's assets.

You can also change the trust's terms or dissolve it at any moment throughout your lifetime.

You don't have the same control over the assets of an irrevocable living trust. You are not allowed to name yourself as a trustee. Also, once it has been formed, you can’t make any changes to beneficiaries or disbursements.

You can alter or revoke a revocable living trust during a divorce. If you have an irrevocable living trust, it will probably stay the same. It's likely that you established an irrevocable trust to provide for your children after your death.

The assets stay in the trust for the beneficiaries since they are not legally yours or your spouse's.

However, there is a slight loophole in the inability to alter an irrevocable trust. If the trust was created by one spouse using the marital property without the other spouse’s consent, a judge can require the person who set up the trust to reimburse their spouse for the items included.

Who should be the trustee after a divorce?

Marriage, having children, new custody arrangements during COVID, moving out of state, and divorce are all examples of major life changes that need reviewing in your estate plan. Estate plans are created to safeguard valuable possessions and loved ones.

A significant event, such as a divorce, has an impact not just on your possessions but also on you and your children.

 If you already have an estate plan, you must make modifications after a divorce to ensure that it works properly. If you're going through a divorce and don't have an estate plan in place, make arrangements to protect yourself, your loved ones, and your financial future.

 You should be the original trustee unless you're forming an irrevocable trust to keep control of your assets. After you die or become disabled, select a replacement trustee to oversee the trust.

 If your initial successor trustee is unable to serve, appoint other successor trustees to help manage the process.

People you trust to manage your assets should be your successor trustees. Don't micromanage your trustees by giving them a long list of things they can and can't do. Choose someone you feel will make sound judgments and will be fiscally responsible.

Setting Up a Trust After Divorce

While divorce can often be a messy and complicated process, adding in the headache of dealing with a trust can make the process even more challenging.

It may be tempting to take all your assets and property and move them into your own personal trust once you find out you are getting divorced. However, you are legally unable to do this.

Instead, you will have to go through the process of splitting and dividing your assets between yourself and your ex-partner. With the help of a trusted lawyer, you can work through your divorce and work towards setting up a living trust when the process is complete.

 

Alexandra Arcand writes and researches for the insurance comparison site, Clearsurance.com. She regularly advises people on how to adjust their assets after a major life change, like a divorce.

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